Monday, November 30, 2015

Australia maintains rate, but can still cut if needed

Australia's central bank left its benchmark cash rate unchanged at 2.0 percent, as widely expected, and restated that "the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand."
But the Reserve Bank of Australia (RBA), which has cut its rate by 50 basis points this year to support growth in light of reduced external demand for its raw materials, also repeated that it had decided to maintain its current rate because "the prospects for an improvement in economic conditions had firmed a little over recent months."
Australia's economy is continuing its "moderate expansion," the RBA said, pointing to a gradual improvement in non-mining sectors along with stronger growth in employment.
The current low level of inflation reflects the spare capacity in the economy and inflation is seen in line with the RBA's 2-3 percent target over the next one to two years, the central bank said.
The rise in house prices in Melbourne and Sydney "has moderated" in recent months, the RBA said, a slight change to last month's statement when it observed that prices had continued to rise though the pace of growth had moderated.
The RBA also repeated its recent statement that the Australian dollar, known as the Aussie, was "adjusting to the significant declines in key commodity prices.
Australia's inflation rate was steady at 1.5 percent in the third and second quarters while growth in the second quarter was only 0.2 percent up from the first quarter for annual growth of 2.0 percent, down from 2.5 percent.

The Reserve Bank of Australia issued the following statement:

"At its meeting today, the Board decided to leave the cash rate unchanged at 2.0 per cent.

The global economy is expanding at a moderate pace, with some softening in conditions in the Asian region, continuing US growth and a recovery in Europe. Key commodity prices are much lower than a year ago, reflecting increased supply, including from Australia, as well as weaker demand. Australia's terms of trade are falling.

The Federal Reserve is expected to start increasing its policy rate over the period ahead, but some other major central banks are continuing to ease monetary policy. Volatility in financial markets has abated somewhat for the moment. While credit costs for some emerging market countries remain higher than a year ago, global financial conditions overall remain very accommodative.

In Australia, the available information suggests that moderate expansion in the economy continues in the face of a large decline in capital spending in the mining sector. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year. This has been accompanied by stronger growth in employment and a steady rate of unemployment.

Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years.

In such circumstances, monetary policy needs to be accommodative. Low interest rates are acting to support borrowing and spending. While the recent changes to some lending rates for housing will reduce this support slightly, overall conditions are still quite accommodative. Credit growth has increased a little over recent months, with credit provided by intermediaries to businesses picking up. Growth in lending to investors in the housing market has eased. Supervisory measures are helping to contain risks that may arise from the housing market.

The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months and has remained mostly subdued in other cities. In other asset markets, prices for commercial property have been supported by lower long-term interest rates, while equity prices have moved in parallel with developments in global markets. The Australian dollar is adjusting to the significant declines in key commodity prices.

At today's meeting the Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand. The Board will continue to assess the outlook, and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target."